Upload
dinhnhan
View
215
Download
2
Embed Size (px)
Citation preview
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 1
1
Leases: Not Just for the Footnotes Anymore
August 17, 2017
2
Lease Standard - Statistics
• 10 year project
• In 2014, $3.0 trillion in off-balance sheet lease commitments
• 47.1% of organizations concerned about their ability to implement
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 2
3
Today’s Presenter: Brian Matney, Manager
Brian Matney is an audit manager in the Birmingham, Alabama office of DHG. Since joining the firm in 2010, Brian has provided assurance services in the form of financial statement audits, reviews, and compilations and has focused on serving the healthcare industry.
As a result of his full-time dedication to the healthcare industry, Brian serves organizations across the entire continuum of care. In addition to audits conducted under generally accepted auditing standards in the United States of America, Brian is experienced in audits under Governmental Auditing Standards.
Education• University of Alabama, Bachelor of Business
Administration, Accounting
• University of Alabama, Master of Accountancy
4
Objective of the Session
Upon conclusion of the presentation you should be able to:
Explain the main differences between current lease accounting standard and the new standard
Identify working definitions of the key concepts necessary to apply the new lease accounting standard
Describe the lessee’s initial accounting for a lease
Develop an outline of a company-specific plan for implementing the new standard
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 3
5
Significant Financial Statement Impact
New lease standard generally requires all leases to be capitalized and recognized on the balance sheet
+ Exception for short term leases
Implementing the new leasing standard may:
+ Change key ratios used for debt covenants
+ Affect bonus and share-based payment calculations
+ Alter dividend information
6
Key Questions in Accounting for Leases
If not within scope of lease standard, must look to different ASC
WHY ASK
Required for initial accounting
Required for subsequent accounting
Account for non-lease components differently
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 4
7
GUIDANCE
Key Questions in Accounting for Leases
Lease defined as “the right to control the use of an identified asset for a period of time in exchange for consideration.”
• Control:
- Right to economic benefits
- Right to direct use of asset
• Determining “right to direct use” may require judgment
• If supplier has substantive substitution rights, customer does not have control; therefore no lease.
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
8
Key Questions in Accounting for Leases
• Term: Noncancelable period for which lessee has right to use asset plus periods covered by—
- Option to extend if lessees is reasonably certain to exercise the option
- Option to terminate if lessee is reasonably certain not to exercise option
- Renewals or extensions of lease at option of lessor
• Exception to the general rule to recognize all leases on the balance sheet for leases with terms of 12 months or less.
GUIDANCE
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 5
9
Key Questions in Accounting for Leases
• Rate implicit in the lease is rate that causes the PV of the net investment in the lease to equal sum of:
- Fair value of asset minus related investment tax credit
- Capitalized initial direct costs incurred by lessor
• If rate can not be determined, use incremental borrowing rate
• Private companies may elect a policy for all leases to use risk-free discount rate
GUIDANCE
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
10
Key Questions in Accounting for Leases
• Non-lease components accounted for separately
• Example: equipment lease contract also includes maintenance services
• Allocate contract consideration and initial direct costs to components based on relative standalone price of separate components
GUIDANCE
Do I have a lease?
What is the term?
What is the discount rate?
Any non-lease components?
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 6
11
Polling Question
How prepared is your organization to implement the new lease standard?
a. Feeling good about it.
b. Thinking about it, but haven’t started it.
c. There’s a new lease standard?
12
Finance vs. Operating Lease Classification
FINANCE LEASE
Substantially the same as a capital lease plus
• Lease of specialized asset for which no alternative use at end of lease term
All leases that do not meet criteria for finance lease
OPERATING LEASE
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 7
13
Initial Measurement
14
Initial Measurement
Very narrowly defined – excludes costs that would have been incurred regardless of whether the lease was obtained
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 8
15
Finance Lease: Initial Accounting
Assets
aaaa $ xx,xxxx
ROU asset $ xx,xxxx
aaaa $ xx,xxxx
$ xxx,xxxx
Liabilities
bbbb $ xx,xxxx
Lease liability $ xx,xxxx
bbbb $ xx,xxxx
$ xxx,xxxx
Equity
cccc $ xx,xxxx
$ xxx,xxxx
• ROU Asset:
- Represents the lessee’s right to the use of the leased asset over the lease term
• Lease Liability:
- Represents the lessee’s contractual obligation to make lease payments over the lease term
16
Finance Lease: Subsequent Accounting
Income Statement
Amortize ROU asset, straight line over useful life or lease term
Recognize interestexpense related to lease liability
Sales $ xx,xxxx
Cost of Sales
$ xx,xxxx
$ xxx,xxxx
Expenses
aaaa $ x,xxxx
Amortization $ x,xxxx
Interest $ x,xxxx
aaaa $ x,xxxx
$ xx,xxxx
Net Income $ xxx,xxxx
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 9
17
Finance Lease: Subsequent Accounting
Cash Flow Statement
Interest expensereported as operating activity
Lease principal payments reported as financing activity
aaaa $ xx,xxxx
aaaa $ xx,xxxx
Interest expense $ xx,xxxx
Cash from operating activities $ xxx,xxxx
bbbb $ xx,xxxx
bbbb $ xx,xxxx
bbbb $ xx,xxxx
Cash from investing activities $ xxx,xxxx
Principal payments $ xx,xxxx
cccc $ xx,xxxx
Cash from financing activities $ xxx,xxxx
Change in cash $ xx,xxxx
Beginning cash $ xx,xxxx
Ending cash $ xx,xxxx
18
Operating Lease: Initial Accounting
Assets
aaaa $ xx,xxxx
ROU asset $ xx,xxxx
aaaa $ xx,xxxx
$ xxx,xxxx
Liabilities
bbbb $ xx,xxxx
Lease liability $ xx,xxxx
bbbb $ xx,xxxx
$ xxx,xxxx
Equity
cccc $ xx,xxxx
$ xxx,xxxx
• ROU Asset:
- Represents the lessee’s right to the use of the leased asset over the lease term
• Lease Liability:
- Represents the lessee’s contractual obligation to make lease payments over the lease term
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 10
19
Operating Lease: Subsequent Accounting
Assets
aaaa $ xx,xxxx
ROU asset $ xx,xxxx
aaaa $ xx,xxxx
$ xxx,xxxx
Liabilities
bbbb $ xx,xxxx
Lease liability $ xx,xxxx
bbbb $ xx,xxxx
$ xxx,xxxx
Equity
cccc $ xx,xxxx
$ xxx,xxxx
ROU asset
Asset equal to lease liability adjusted for
- Prepaid or accrued lease payments
- Remaining lease incentives
- Unamortized initial direct costs
- Asset impairment
Liability
Liability equal to PV of remaining lease payments at discount rate determined at inception
20
Operating Lease: Subsequent Accounting
Sales $ xx,xxxx
Cost of Sales $ xx,xxxx
$ xxx,xxxx
Expenses
aaaa $ x,xxxx
aaaa $ x,xxxx
Lease expense $ x,xxxx
aaaa $ x,xxxx
$ xx,xxxx
Net Income $ xxx,xxxx
Income Statement
Single lease expense, same as current GAAP –recognized straight-line over the lease term
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 11
21
Operating Lease: Subsequent Accounting
Cash Flow Statement
Lease expense reported as an operating activity
aaaa $ xx,xxxx
aaaa $ xx,xxxx
Lease expense $ xx,xxxx
Cash from operating activities $ xxx,xxxx
bbbb $ xx,xxxx
bbbb $ xx,xxxx
bbbb $ xx,xxxx
Cash from investing activities $ xxx,xxxx
cccc $ xx,xxxx
cccc $ xx,xxxx
Cash from financing activities $ xxx,xxxx
Change in cash $ xx,xxxx
Beginning cash $ xx,xxxx
Ending cash $ xx,xxxx
22
Finance Lease: Walkthrough
Company leases equipment. Facts:
• Lease term: 60 months with option to extend for 24 months
• Lease payments: $2,500 per month during initial term; $2,750 during extension
• 10% increase during extension NOT considered significant financial incentive; therefore lease term is 60 months
• Initial direct costs: $7,000
• Discount rate: can not determine rate implicit in lease. Incremental borrowing rate 5.25 %
At inception:
• Company makes first month’s payment of $2,500 and incurs the $7,000 initial direct costs
• Lease liability measured as PV of remaining 59 payments at 5.25%. Equals $129,752
$ 139,252 $ 2,500$ 129,752
ROU Asset Lease Liability Cash
$ 7,000
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 12
23
Finance Lease: Walkthrough
Subsequent accounting in year one
• Lease payments made during the year: $27,500
• ROU asset depreciated straight line over 5 year lease term. $139,252 ÷ 5 = $27,850
• Interest expense using effective interest method and 5.25% discount rate: $5,773
$ 27,850
$ 27,850
$ 139,252
$ 129,752$ 5,7735,773
ROU Asset
Lease LiabilityDepreciation Expense Interest Expense
Cash
$ 27,500
$ 27,500
$ 108,025
$ 111,402
24
Operating Lease: Walkthrough
$ 129,752 $ 2,500$ 7,000
Company leases equipment. Facts:
• Lease term: 60 months with option to extend for 24
• Lease payments: $2,500 per monthduring initial term; $2,750 during extension
• 10% increase during extension NOT considered significant financial incentive; therefore lease term is 60 months
• Initial direct costs: $7,000
• Discount rate: can not determine rate implicit in lease. Incremental borrowing rate 5.25 %
At inception:
• Company makes first month’s paymentof $2,500 and incurs the $7,000 initial direct costs
• Lease liability measured as PV of remaining 59 payments at 5.25%. Equals $129,752
$ 139,252
ROU Asset Lease Liability Cash
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 13
25
Operating Lease: Walkthrough
Subsequent accounting in year one
• Remaining lease payments made during the year: $27,500
• Lease expense: 1/5 of cash payments to be made during the lease term ($30,000) plus 1/5 of initial direct costs ($1,400) Total = $31,400
• Interest expense is same as finance lease: $5,773
• Remaining expense amount is credited against the ROU asset. $31,400 - $5,773 = $25,627
$ 139,252
$ 129,752
ROU Asset
Lease LiabilityLease Expense
$ 31,400
$ 25,627
5,773
Cash
$ 27,500
$ 27,500
$ 108,025
$ 113,625
26
Lessor Accounting: What’s the Same
Lessor accounting largely unchanged from current
+ Most operating leases remain operating leases
+ Current lease classification is retained as well as accounting for each type
OPERATING LEASE CLASSIFICATION
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 14
27
Lessor Accounting: What’s Changed
Classification changed to align with lessee guidance
Same classification criteria as finance lease in lessee model
Lessor to classify as direct financing if certain conditions are met
Operating leases
+ Incremental tests for leases involving real estate were removed
+ Leveraged leases no longer exist unless commenced prior to adoption
28
Transition: Effective Dates
Effective dates for public companies
+ Fiscal years beginning after December 15, 2018, including interim periods—i.e., calendar 2019 starting in Q1
Effective dates for private companies
+ Fiscal years beginning after December 15, 2019—i.e., calendar 2020 year-end and calendar 2021 interim statements
Modified retrospective application with optional practical expedients
+ Must apply new standard as of beginning of the earliest periodpresented
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 15
29
Transition: Practical Expedients
You may be able to elect “practical expedients” to ease burden of adoption
• Reassess whether expired or existing contracts are or contain leases
• Reassess lease classification for any expired or existing leases
• Reassess initial direct costs for existing leases
• May use hindsight in determining lease term
You do not need to
You may
30
Possible Implementation Challenges
Systems
Operations
Financial Reporting
• Lessees with significant lease portfolio may need to evaluate current system and evaluate whether it can capture relevant data for new standard
• Compliance with debt covenants and other contracts
• May affect lease vs. buy decisions
• System change may require change to internal controls
• Increased use of management judgment
• Deferred income taxes may be affected
• New disclosure requirements
POSSIBLE CHALLENGES
Leases: Not Just for the Footnotes Anymore
August 17, 2017
DHG Birmingham CPE Seminar 16
31
Implementation Next Steps
Inventory all existing lease contracts
- Aggregate similar leases to avoid redundant analyses
- Identify short term leases that will not be capitalized
Assess implementation challenges and options
- Existence of substantive substitution rights
- Choice of discount rate
- Determination of lease term
- “Practical expedients”
Estimate impact implementation will have on financial statements, key ratios and metrics
- Evaluate impact changes will have on other contracts, e.g., loan agreements, management compensation
- If necessary develop plan to mitigate impact on other contracts
1
2
3